Governments and markets

28 November 2011

It has been an extraordinary month or so in Europe, which has seen new governments in many countries: Greece, Italy, Spain, and very soon Belgium. In the first two cases, Greece and Italy, the previous government had become unsustainable, having lost the confidence of the markets and other EU member states, though not necessarily that of the people even if it was deeply unpopular: it’s difficult to say what would have happened, had the rescue package been put to the Greek people in a referendum, or if Italy had held a general election. The governments were forced out, more or less, by pressures exerted from without, more so than from within these countries. In Spain, a general election did take place and brought PP into power. After more than 500 days after the elections in June 2010, Belgium is finally on the verge of establishing a new government.

The room for manoeuvre is small for the new governments in Greece and Italy, as they will need to implement further austerity measures. Whoever formed the new government, the situation would have been the same. However, it is true to say that neither government has been elected by the population, and there remains questions about their deficit in democratic legitimacy. Can or should governments that have not been elected on the platform of austerity push through the measures deemed necessary by the markets and the outsiders?

The Spanish electorate has voted for a new government, and it gives Mr Rajoy and his cabinet a stronger mandate to push through the policies, but there is little doubt that austerity will follow. Indeed, the markets seem very impatient, and like for Greece and Italy, there is not much of a leeway for Mr Rajoy’s government.

Belgium has now been added to the list of the countries that is seen as high risk in Europe and for the euro. It’s partly the deep domestic division between the Dutch and French speakers, but also due to the debt and deficit figures for Belgium which are not partciularly encouraging. The main parties trying to form a government have agreed on the budget, including austerity measures, but it remains to be seen if this is sufficient to satsify the markets.

In essense, whoever governs, there is little room for manoeuvre in terms of policies, as deficits and debts must be cut, pain inflicted on the people, and it raises a very fundamental question: who governs a state? The elected government or the markets? As the cuts bite, and the economy stagnates, more and more people may wonder who are the real sovereigns. It may not just be the economic structure or capitalism that is being tested, but also the current political system and democracy.